Global Economics

Luring Customers with Local Call Centers

Finding that the cost savings of offshoring are offset by losses in client retention and satisfaction, British companies are moving support operations back home

It's no secret that there's something of a consumer backlash against offshore call centers. Some companies, including Dell (DELL) and US Airways Group (LCC), have even pulled some of their call center work back to the U.S. after complaints from customers about everything from foreign accents to the quality of support.

Now some British companies are taking it even further. To woo consumers frustrated with overseas customer service, companies such as energy supplier Powergen and Royal Bank of Scotland (RBS.L) subsidiary NatWest are running advertisements highlighting the fact that they use only call centers based in Britain. They're betting that the substantially higher cost of operating call centers in Britain will more than pay for itself with better customer satisfaction and retention.

The strategy makes some sense. According to a recent survey by pollster YouGov (YOU.L), a mere 4% of people have a favorable experience dealing with call centers of all sorts and 44% say their biggest gripe is contacting offshore call centers. Such low satisfaction rates can hurt business: Call center advisory Merchants Consulting, based in Milton Keynes, England, says one in five Brits has changed suppliers due to a bad call center experience, costing companies an estimated $4.5 billion each year in lost business.

Round-Trip Ticket

A growing number of British companies are warming to the idea that paying higher wages to local call center employees pays off. "Foreign call centers feed into the perception that companies aren't interested in their customers," says Rita Clifton, chairman of London-based brand consultancy Interbrand. "Firms will have to spend more money on U.K. centers so customers feel taken care of."

That's what motivated Powergen, a subsidiary of German energy utility E.on (EONG.DE), to rethink its call center policy. After offshoring almost 10% of its customer service work to India, the power company saw a decline in customer satisfaction rates, and by June, 2006, had returned all of its call centers to Britain. A company spokesperson declined to say how much business was lost due to Powergen's offshoring adventure. But after Powergen began bringing the work home, complaints to regulators fell 75% year-over-year as of April, 2006.

The marketing value of the trend toward Britain-based call centers shouldn't be underestimated. According to Martin Dove, managing director at Merchants Consulting, it costs companies almost five times as much to attract a new customer as it does to retain an existing one. British call centers can thus be cost-effective if taken as part of a company's overall business strategy. For instance, total global spending on call centers last year amounted to $34 billion, compared to $454 billion spent on advertising worldwide, according to media consultants Zenith Optimedia (PUBP.PA). Yet money shifted from advertising to improved call center operations can be a more efficient way of attracting and holding on to customers, thanks in part to word of mouth.

Cheaper, But Not Cost-Effective

A famous study in 2004 by consultancy ContactBabel in Sedgefield, England, made the point even more vividly. It found that British call center employees could answer 25% more calls per hour than their Indian equivalents and resolve 17% more of the customer problems on the first call. More important, in an example involving a hypothetical British bank, ContactBabel found that the entire savings earned by shifting 1,000 call center jobs from Britain to India would be wiped out if only an additional one-third of 1% of the bank's customers defected in a year.

"Many companies went to India because it was fashionable," says Michael Stock, a founding member of the Customer Contact Assn. (CCA) industry group in Glasgow. "Some found it a bad bet. It may have been cheaper, but it wasn't cost-effective."

Even so, few companies are committing 100% of their call center work to Britain. After all, starting annual salaries for British call center workers are around $22,000—almost 10 times that of their Indian counterparts. Such disparities will always make some form of offshoring appealing to companies looking to trim expenses.

Moving Up the Value Chain

Instead, what many are now doing is dividing the work—keeping top-of-the-line customer service and support in Britain and shifting more routine jobs overseas. The main reason for this is to hold on to high-end customers. For instance, HSBC (HBC) bank and British Airways (BAY.L) now offer British call centers for clients wanting detailed financial or travel advice, while maintaining their Indian call centers for low-end queries.

This "multisource" approach, where a company has centers in various countries to answer different types of calls, is becoming the norm, but could come under pressure as offshoring companies seek a greater share of customer service business. "It's a simplification to think India will be happy doing the mundane call center tasks," says CCA's Stock. "India's looking to move up the value chain."

Working against that are the companies using local customer support as a marketing tool. Insurance company Saga says it has kept its customer service in Britain to satisfy older clients, many of whom are in their 50s or older. Co-Operative Bank adamantly proclaims its commitment not to send jobs oversees, calling the stance a competitive advantage. And NatWest makes a point of telling potential new clients, in posters and TV ads, that it doesn't operate any call centers outside of Britain.

Critics decry these advertising campaigns as xenophobic, saying they play on nationalism and prejudices about call centers in the developing world. But Interbrand's Clifton disagrees, arguing that the marketing shows a firm is willing to spend that little bit extra. "It symbolizes the concern for personal attention to the customer," she says. In fiercely competitive sectors such as banking and insurance, that can be enough of an edge to compensate for higher-cost support staff.